B. Riley Financial, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good afternoon, and welcome to B. Riley Financial's Fourth Quarter and Full Year 2020 Earnings Call. B. Riley Financial has issued a press release and presentation detailing its financial results for the fourth quarter and fiscal year 2020. Copies are available in the Investor section of the company's website, at ir.brileyfin.com. Today's conference call will include a discussion of non-GAAP financial measures. Information reconciling these non-GAAP measures to the company's GAAP financial results can be found in the earnings release. As a reminder, today's call is being recorded. An audio replay will also be available on the company's website later today.

[Bryant Riley:]

Thanks, and welcome, everyone. B. Riley Financial reported record revenues and profitability for both the fourth quarter and full year of 2020. In the fourth quarter, we reported revenues in excess of $410 million and total revenues of over $902 million for the full year. Based on our performance in 2020, despite an otherwise challenging year, we are increasingly confident in the earnings power of the platform we've developed. Our results demonstrate an increased profitability from across our businesses and, particularly, our brokerage business. Investment banking delivered impressive results in Q4, contributing to record consolidated quarterly operating revenues of $270 million and record quarterly operating EBITDA of $126.8 million. Importantly, we have been beneficiaries of not only increased deal flow, but also from a number of larger and more significant deals across our equity Capital Markets and Advisory businesses. We saw strong momentum from IPOs, SPACs and a quarterly best for ATM desk. In addition to our higher operating results, we were a beneficiary of the improved equity markets, which resulted in investment gains of over $140 million for the quarter, resulting in total gains for the year of approximately $104 million, a sharp recovery in our investment book from the markdown in Q1. With retail liquidation activity, continued growth in our Consulting and Advisory businesses and steady contribution from Appraisal, Principal Investments and Brands, we believe we have built a platform to not only withstand volatile markets, but also to benefit amid disruption. As our businesses have grown, we are in the fortunate position of generating material free cash flow from our core operations in addition to our investment portfolio. While we continue to see extremely attractive uses for our capital, we also believe it is important to return a portion of our profits directly to our shareholders with the cash flow that we generate. As a result, we feel strongly that a balanced capital allocation policy includes substantial returns of capital to our partners. To that end, we have declared a total dividend of $3.50 per share, which includes an increase to our regular annual dividend to $2, or $0.50 per quarter, and a special $3 dividend. Given the prospects and momentum we see across our businesses, we would expect our dividend to grow over time. In addition to our dividend policy, we repurchased over 2.1 million shares during the year. While B. Riley's momentum has never been stronger, we recognize there's always work to be done. We continue to look at other opportunities to lower our cost of capital to reflect our current state of operations.

[Phillip Ahn:]

Thanks, Bryant. Welcome, everyone. As Bryant mentioned, our fourth quarter and fiscal 2020 results represented an all-time high for B. Riley Financial in terms of revenues and overall profitability. For the three months ended December 31, 2020, we reported record total quarterly revenues of $410.2 million, up from $165.2 million for the fourth quarter of 2019. Net income available to common shareholders totaled $170.1 million, or $6.55 per diluted share, up from $16.9 million, or $0.59 per diluted share, for the prior year quarter.

[Tom Kelleher:]

Thanks, Phil. As Bryant noted earlier, the key recent development is our acquisition of National Holdings. This is a meaningful addition to our platform and a powerful combination for our respective firms. National adds 700 registered representatives and close to $20 billion of assets to our current roster of over 170 advisers and $12 billion in assets. With National also comes an established middle market-focused banking and capital market franchise, complementary new service lines like tax advisory and expanded offerings such as National's private shares platform, which provides qualified clients access to pre-IPO investment opportunities. At the same time, B. Riley Wealth Management, our existing legacy firm, has evolved into an integral piece of our platform. We have seen continued growth in this division, both in terms of profitability but also in talent. Combining with National forms critical mass in both our W-2 and independent adviser channels and significantly expands our respective equity syndicate offerings. The continued growth of our advisers remains our top priority as we work to integrate National's professionals into our platform. Importantly, we believe this combination will only serve to increase all of our professionals' businesses through a broader suite of investment solutions for clients as well as enhanced sales and trading capabilities. We are incredibly excited to welcome our new colleagues at National in the coming weeks and look forward to sharing more in the coming quarters. Now moving to our investment banking and institutional brokerage division, B. Riley Securities. As noted, B. Riley Securities delivered its best quarter yet. We saw momentum both in our Capital Markets and Advisory businesses, with meaningful gains driven by several noteworthy transactions. A few highlights include a $292 million IPO for software security company, Telos; Healthcare Services' $331 million SPAC IPO; the sale of Bed Bath & Beyond's Christmas Tree Shops subsidiary; a completed restructuring of RTW Retailwinds' New York & Company; and $565 million jointly raised for AMC through our ATM desk. On this final point, Q4 was the best-ever quarter for our ATM business, which more than doubled its revenue contribution compared to Q3. B. Riley has served as the number one market leader for ATMs in the past decade, and we expect increasing activity in the coming year as ATMs see broader adoption and are more widely accepted as a strategic capital markets tool for both healthy and distressed companies.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Wes Cummins of 272 Capital. Please go ahead.

[Unidentified Analyst:]

This is on for Wes. A quick question on capital allocation. Really great to see the minimum $5 dividend implied for this year. Would love to get maybe greater color on how you balance the dividend versus the buyback as well as opportunistic investments such as Lingo. Thank you.

[Bryant Riley:]

Sure. This year was it felt like five years in one. And in the beginning of the year, at points in time, we were buying our stock at $14, $15; bonds at a 50% discount. And now we are paying out this dividend. And so we're always thinking about the different options and what's best for our company and our employees and our shareholders. And so there's a balance there. We don't think we've compromised in any way on any of those things. We have plenty of capital to go find opportunities. We obviously purchased a large chunk of Justice, the Lingo transaction, National, added meaningful groups into the company. And we've got plenty of cash to do more. But at the same time, we think we're at an interesting inflection point where we had always said 25% of our EBITDA would be a target to distribute to our shareholders. And I think the more stable we get, the more our cash builds, I could see that number getting larger. But we've got to be really careful. This is a volatile business, and it can be humbling. And right now it is humming, and we're a beneficiary of that. And I think we're a beneficiary of some of the things we've done as a company. But we've just got to make sure that we're super balanced. As far as Lingo, we're always looking for other ways to create value off of the platform. We have a lot of inputs and a lot of proprietary opportunities. And now we've got 700 advisers that will also maybe add proprietary opportunities. So we think we're just going to see a lot of flow, and some of that comes directly to the company. Obviously, we have a SPAC out there. We've done two SPACs, and that's an opportunity for us to take some of that proprietary flow. So we feel really good about where we are. We have a lot of momentum. But we've been – we're cognizant that 12 months ago was a lot different, and we just have to make sure we balance all those things.

[Unidentified Analyst:]

That's great. That's great. And then on your recent debt offering, it was 150 bps below your current highest cost of debt. Should we expect that you guys should be able to continue to lower your cost of debt as we go on? Or I'd love to hear any color on that.

[Bryant Riley:]

Look, our cash flow and I think all of the inputs to how debt is valued, they're all better. We are a unique company. That makes it a little bit harder to evaluate for debtors and equity holders. We've got a number of different businesses, and we do a lot of different things. And I think – and we're able to do a lot of different things. And I think that comes with a little bit of a higher cost on our interest rate. But I think you're right, doing the most recent baby bond at 6%. And you would think that if we put a senior facility in there that we could do better than that. So that is an important mandate of ours over the course of the next year, and we've already started on that.

[Unidentified Analyst:]

Nice. That would be great and actually kudos. Thank you once again.

[Bryant Riley:]

Thank you.

[Operator:]

Our next question comes from of THC. Please go head.

[Unidentified Analyst:]

Hi, guys. First off, congrats on a phenomenal quarter and a great year. As far as your portfolio in light of the National acquisition and the kind of realignment of the segments, do you foresee continuing to be opportunistic with your acquisitions? Or are there holes in your product portfolio that you think could be filled and need to be filled?

[Bryant Riley:]

Okay good and thanks for the comments. There's always going to be holes, right? We could expand on a number of different areas

[Unidentified Analyst:]

And then you guys were relatively early on the whole SPAC movement. Are you running into increased competition? Because I know that Eos is a good example. You're not looking at “fuzzy” private companies, but there's a lot of capital being deployed in that area. Is that a concern to you?

[Bryant Riley:]

B. Riley not as an underwriter, but as a principal to B. Riley SPACs? Is that what you're referring to?

[Unidentified Analyst:]

Yes, yes.

[Bryant Riley:]

I think we have the most compelling argument out there to merge with us. We went public as a small company. We grew through acquisitions. We grew through equity offerings, a couple of equity offerings. We grew through debt offerings. And we've got a group of people in this firm that all want to see whatever company we merge with succeed. So you have all the M&A group. You've got the Capital Markets group. We have really good relationships with the sell side, with the buy side. So we think – and then we're picking from – we're trying to pick from a bunch of proprietary relationships just because of the business we're in. So I would say of course there's more competition. I don't know how you could say there's not. There's just so many more SPACs out there. But I think we have a lot of runway for based on where we sit. And that's why you'll see we just filed our fourth one publicly today. So we feel like there's a lot of opportunities. Remember, you went years without any kind of smaller cap IPOs. Right now, obviously, you're seeing a lot of really growthy companies come public, but there's a lot of great companies that should be public, and they just – the markets weren't open for them. And I think they're going to be more open for them, and that excites us. So we still think there's a fair amount of runway there.

[Unidentified Analyst:]

Great. Again, you guys knocked it out of the park. Thanks.

[Bryant Riley:]

I appreciate it.

[Operator:]

Our next question comes from Paul Dwyer of Punch & Associates. Please go ahead.

[Paul Dwyer:]

Hi guys. Good afternoon.

[Bryant Riley:]

Hi, Paul.

[Paul Dwyer:]

Wanted to start on the Capital Markets side. Could you spend a little more, Tom touched on it a bit, but spend a little more time on kind of how Q1 has been in terms of additional Capital Markets strength? It's obviously been strong. And then in terms of SPACs that you've underwritten in Q4 and through Q1, any more insights you can provide into how that provides visibility into the rest of the year for Capital Market activity?

[Bryant Riley:]

So look, I would say that on the Capital Markets side, this has been years and years of investment in small and mid-cap companies. We didn't start last year doing this. We started in 1997 and for the first seven years we didn't even have a banking. We were just a small-cap research firm. And so the relationships and the investment we've made are now paying off in a meaningful way with the relationships with the companies we've covered, some for 20 years. And I think the people that have worked here for a long time are just – they've been primed to take advantage of that. Over the course of the last year, we have not added any additional operating expenses to our brokerage business. This is the same people that were here three years ago and just taking advantage of all of the experience we've had and sticking to our knitting, and now we're really reaping the benefits from that. Clearly, there is an uplift, a rising tide, for sure, effect here. But I wouldn't opine on where we are on that. I just know that we're – we have a team that's going to, I think, outwork our competition and continue to gain market share. As it relates to the SPAC business, and I've been asked a bunch of times where we think we are in that, I would say, as I mentioned earlier, there's a lot of companies that have had the window shut for them for a long time. So I think you're going to see maybe a broader breadth of companies going public, not just the uber-growth companies. And I think institutionally, you're seeing private placements getting done with really quality brand institutions. We're going to help those companies have assurity to go public. How founders' percentages work out may change, I don't know, but I think that there's a lot of opportunities. And so I think our total number of SPACs out there, and including one we're doing today, which is our biggest yet, we've got the back-end fee opportunity is 10x where it was nine months ago, and we have not had a SPAC that has expired without doing a deal. Obviously, there's a lot of newer ones. So take that with a little bit of grain of salt. But we try to take the approach of investing with the sponsors, not just being a churning kind of business for us. So we feel really confident that the SPACs we have out there that are public will complete a deal. And there's $50 million-plus back-end fee opportunities and, obviously, help them with their private placements. But most importantly, we help them with taking a good company public that needs access to capital and hopefully building a long-term relationship with those companies. So this is not just the SPAC. It is about building longer-term relationships that benefit the firm. Did I answer that?

[Paul Dwyer:]

Okay. You did. That's perfect. I guess the next part I wanted to touch on was the National – just kind of your overall wealth management platform. So with the $30-plus billion of assets, can you just flush out what that business looks like on a standalone basis? And I assume it's one of your more predictable businesses?

[Bryant Riley:]

Well, you're certainly seeing a move towards advisory over kind of regular-way brokerage. So that advisory business is usually on assets. We think that – so National is – we really like the National team, and we think that it's going to be a great fit. The thing about National is that the infrastructure that they put in place for the wealth management, particularly in the independent side, makes it hard to – it's a hard business, being independent. And again, the management team has done a great job, and we're super excited. But now you're going to be able to leverage our infrastructure, our products, and we've already seen that and it's been great. We have seen the National network really embrace our research and embrace our deals. And so together, you'll have a business that will be doing in excess of $325 million in revenues. And we would expect that, we would hope to get to at least a 10% EBITDA margin and then get a bunch of benefits on the other side of that. But National hasn't been greatly profitable for five years, and also recognize that interest rates have really been a negative factor. Usually, in the old days, they'd make a lot of money from the money on their money, getting a piece of the interest rate on the cash from their clients, and that all went away. So that's out there, too. But I think you can use that kind of number, and it might take a little bit of time. But I think the most important part is think about the compelling offering we have to a company, a public company, that wants to do a deal, not only being willing and anxious to utilize our balance sheet to get a deal done. And now we've got the retail network. And then we have clients, like yourself, that have been participants in our deal and I think feel highly of the way we put deals together. And so all those things together I think makes us a really, really powerful force. So there's a financial side of it, which I kind of outlined, but there's also the other benefits. And there's also the benefits of a National rep referring a company that one of their clients owns and wants to be sold or wants to buy things. And so we need to put all that together. It's a lot of hard work. But we've done it with the GlassRatner acquisition, and we've done it with other acquisitions. So we think that this will just enhance that.

[Paul Dwyer:]

Okay. That makes sense. Last for me is on the Brands side, turning in a nice little business for you guys. I guess, one, how seasonal is the business? And then, 2, is that 70%-plus operating margin sustainable and typical?

[Bryant Riley:]

So just to describe that business, we have a relationship on most of those brands with Bluestar Group, and they provide all of the operating expenses. So just think of us as, for the most part, partners, minority partners, in most of those brands. So Hurley, we own 40%; Justice, we own 40%. The 6-brand portfolio that we bought 1.5 years ago, we own closer to 80%, but they still manage that. So the numbers that you see us report should be mostly margin. So that's sustainable. In terms of cyclicality, there's not a ton. Hurley does a little bit better in the summer, and some of the other brands do better in the winter. But most of these, just so you understand the way the business works, is there's a minimum license that you get from a licensee, and that's paid quarterly or monthly, and then you get overages. And so the minimum is pretty consistent; the overages could be a little seasonal. But I wouldn't say to you that it's anything that's going to be overly noticeable. So we love that. We think that that business for us is a good counter to our – we always say this episodic and recurring. And we love the relationship we have with the Bluestar guys and think that we'll find some more things to do with them.

[Paul Dwyer:]

Okay, great. That’s it for me. Really nice to hear and thanks for all the work.

[Bryant Riley:]

Paul, we appreciate your support. Thank you.

[Operator:]

Our next question comes from Keith Rosenbloom of Cruiser Capital. Please go ahead.

[Keith Rosenbloom:]

First, I just want to reiterate all the congratulations. What a great year and a great quarter, Bryant. Great job from your team.

[Bryant Riley:]

Thank you.

[Keith Rosenbloom:]

You’re welcome. I wanted to just get a little color on something that the prior questioner was asking about. You guys have now put a lot of pipes into the marketplace, and this seems like you're effectively seeding an investment banking business for the foreseeable future. Do you have any sense as to the earnings capacity you have? You mentioned the back-end fees every time you close a SPAC. You're, obviously, every time you do a SPAC, you've got a pipe, a potential pipe, you've got a potential M&A fee. And then obviously, the fees you get when the SPAC itself closes. Do you think of that as backlog? And do you have any concept of what that revenue could be, assuming you guys do the work and earn the business and are able to close?

[Bryant Riley:]

So I can speak specifically to the SPACs that we've already underwritten. There's approximately $50 million of kind of deferred fees as those SPACs get de-SPAC’d, and then there's the pipes involved with them. But what I would say is what excites me more than that is the size of some of the other deals we're doing, the advisory deals. Managing or running a $300 million IPO, where there's not a lot of firms that have done that, other than the bulge bracket. And to the extent we can continue to see our brand increase, our platform increase, when you all of a sudden start picking up $10-plus million fees on a deal, that's when it gets really exciting. And I think we have a lot of room there. I think we're going to be able to put bigger and bigger deals together and start to see some outsize ?- some fee opportunity. And you're right, and I said this in a previous call, every time we do a SPAC or every time we cover a company, that's a relationship that we need to utilize in every way we can. We'll sell them a magicJack if it helps our relationship. So we've got the Advisory. We've got the former GlassRatner group that can help them with any new businesses and evaluations. We've got our Appraisal group that can help them think about their assets. And so all of those put together should create opportunities for us to have really, and has, put together great relationships. And now we've just got to make sure we take advantage of that. And it feels like there's a lot of opportunities for us. I can't pick a number, but it feels like we should really take advantage of those relationships and have a monetary benefit. And obviously, the SPAC backlog is real. And I do think about that as backlog.

[Keith Rosenbloom:]

Congrats again.

[Bryant Riley:]

All right, thank you.

[Operator:]

This concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Riley for his closing remarks.

[Bryant Riley:]

Well, thank you very much. We really appreciate all the support, and we're really excited to have the National team join us and all of their brokers, including Bob Laudati. And we couldn't do this with all the people without all the employees and partners we have and investors we have. So thank you very much. We look forward to reporting next quarter.

[Operator:]

Thank you. Before we conclude today's call, I will provide B. Riley Financial's safe harbor statement, which includes important cautions regarding forward-looking statements made during this call. Statements made during this call about B. Riley Financial's future expectations, plans and prospects and any other statements regarding matters that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors include the unpredictable and ongoing impact of the COVID-19 pandemic as well as the other risk factors explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements whether because of new information, future events or otherwise. Thank you for joining today for B. Riley Financial's fourth quarter and full year 2020 earnings conference call. You may now disconnect.